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Financial Planning

5 things to know about a financial advisor

Carlos Dias Jr. is a wealth manager
and founder of Excel Tax & Wealth Group,
an advisory firm offering strategic financial planning services to
high-net-worth individuals, business owners, executives and retirees. He
maintains a highly personal approach by accounting for the distinct needs that
his clients have at different points in their financial lives. Carlos is a contributor for
Forbes, MarketWatch, the Huffington Post, TheStreet and
MainStreet and has been featured in Fortune magazine, the Wall Street Journal,
the Christian Science Monitor, MSN Money, CBS Local 6 News, Annuity 123,
WealthManagement.com and NErd Wallet. Follow Carlos on
Twitter @CarlosADiasJr and
Facebook.

Finding the right advisor can be tricky, especially considering the many tricks a financial advisor might have up his or her sleeve for prospective clients. From overpriced fees to overly optimistic guarantees, there are ways to look past all the gimmicks and see if an advisor measures up to your needs. Here are five things to know about your financial advisor:

1. Be wary of attention-grabbing titles

The alphabet soup following your advisor's name are there to draw you in, but are all initials the same?

In the world of financial advisory, the answer is no. Many advisors like to list their many credentials after their names in the hopes of attracting new clientele. According to the Financial Industry Regulatory Authority (FINRA), there are at least 166 designations available and even industry experts have a hard time remembering or distinguishing them all.

Some credentials indicate experience or knowledge in key areas of the financial-planning process, such as divorce or insurance products. Others, like Chartered Financial Analyst (CFA), Certified Financial Planner (CFP) or Certified Public Accountant (CPA), are some of the most commonly used and prestigious designations in the industry. CFAs, CFPs and CPAs hold extensive training in their fields and are often required to have more than a Bachelor's Degree worth of training. Yet other designations may require only a weekend of training to earn.

With such a widespread use of easily earned titles alongside those more challenging and ones, investors need to do their homework and see what their prospective financial advisor is qualified to handle and their prior training in industry areas.

2. What does your advisor get from you?

Like most business professionals, financial advisors have to earn a living, and for many, hidden perks and commissions could be lurking on the products they sell you.

Commissions could be hidden in more places than you think. Advisors who work directly on commission for insurance products or other financial products, for example, need to meet monthly goals, so look out for new products that they might advise you to buy toward the end of the month. Mutual-fund companies offer advisors bonuses when their funds are suggested to clients, a phenomenon called "revenue sharing."

Some advisors warn their clients through contract disclosures about these potential conflicts of interest, and for those who allow their clients to pursue options that won't give them these mutual-fund bonuses they might charge higher fees to make up for lost revenue. And recommended products like mortgages, bank accounts, or credit cards? They might be disguised as products meant to simplify your financial needs but they might also hold hidden perks for your advisor.

There might also be other incentives for the products advisors sell you. They might be in the running to win company bonus trips. What about investments with surrender charges? They might carry a heftier price tag than you might think.

3. How is your advisor formulating his or her predictions and guarantees?

Advisors are often quick to offer their clients stunning performance predictions and guarantees on their investment proposals. Yet investors should ask where they are deriving those figures from. As incredible as those results sound, more often than not those figures don't hold as much certainty as you may think. They may be the product of software that generates trend lines based on a few inputted factors like age and current savings rates against historical patterns.

Don't let yourself be guided by your advisor's calculations alone. Their calculations are based on mathematical models that produce probabilities from thousands of possible market scenarios and assumptions. An advisor who pushes predictions and guarantees as foolproof is a red flag. While the best financial plans do involve some calculations, a multitude of unpredicted circumstances could devastate, transform, or perhaps even enhance your current situation and completely change the outcome of your financial future.

4. Beware of guarantees on performance

Investors base their idea of success on investment performance, naturally. However, investment performance involves a wide range of factors and there are no clear, guaranteed indicators that have proven to be foolproof every time. Therefore, investors should be wary of advisors who have such definite methods of measuring how an investment is doing.

An advisor’s job is to maintain the client’s overall satisfaction by ensuring a successful portfolio that accurately meets the client’s goals, interests, wants and needs. Investors should be the real judges of performance based on how the investments satisfy all of those aspects of their lives.

Thus, the lesson here is that until definitive research methods or models or measurements are produced to accurately analyze or predict an investments current performance or future trajectory, and until market conditions no longer have thousands of possible conditions that can change an investment's performance at any point in time, beware of all advisors who guarantee or promise certain performance reports or predicted growth.

5. Read the fine print

Some advisors tell clients right from the start in the disclosures about where their money will come from based on what your investment interests are. Some will be honest with their commissions and fees if you choose products that will not contribute to their commissions, therefore it pays to read the fine print.

As an investor, you have the right to clarity when it comes to your investments and how they will benefit your advisor as well. Your advisor should never make it an issue when asked a question about how they will benefit from your investments. After all, it's a mutual partnership between the advisor and client where the advisor will receive his income based on how satisfied his or her client is with how their life goals are being met.

Investors should do their homework and understand terms, aspects, and factors of the industry so they know what questions to ask. And don't expect all potential conflicts to be put in the open. Some may require additional digging or questioning outside of the information being presented to you. Read every line, sentence, or note to the fullest extent.

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